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COMMENT: US Euro corp supply to ease in 2017 despite busy start?

2016 was a record year for investment grade/split rated non-financial corporate issuance in Euros with the EUR291.94bn issued in 2016 courtesy of 413 separate deals smashing the previous record of EUR238.12bn from 361 issues the year before.

And making a notable contribution to the total both this year and last were US issuers where supply in Euros totalled EUR58.63bn and EUR59.95bn in 2016 and 2015 respectively.

This means that reverse yankee issuance in the single currency made up the highest totals of any jurisdiction in both the past two years, surpassing France which came in in second place with EUR56.55bn and EUR40.1bn in 2016 and 2015 respectively.

Attractive proposition

US issuers have been lured across the Atlantic predominantly by historically low interest rates, equating to attractive all-in yields for those not looking to swap the proceeds back to dollars.

There are also other advantages such as the fact the single currency offers more flexibility when it comes to maturities than the more traditional benchmark tenors in the dollar market, while Euros also allows US issuers to expand their investor bases.

A fairly robust M&A market has also prompted US issuers to reach out to European investors, including the likes of Honeywell and FedEX which raised EUR7bn between them to finance debt associated with their respective acquisitions of Elster and TNT Express.

While M&A remains a bit of a lottery when it comes to dictating issuance volumes next year. the jury is out as to whether US issuers will be able to maintain their position at the top of the Euro supply tree in 2017.

Other potential caveats were highlighted by market participants in this respect, in particular the possibility that US president-elect Trump's plans to slash tax on offshore earnings from 35% to 10% will encourage US companies to repatriate their cash instead.

This potential decline in issuance volumes may not be just limited to US borrowers, however. A number of more familiar frequent European issuers have already capitalised on historically low rates, opting to execute a large amount of pre-funding, while others that wanted to take advantage of the ECB's CSPP backstop have also already done so.

On the flip side, while the M&A market is expected by some to be less buoyant next year than it was this year, and in particular in 2015, this is traditionally a wild card in terms of the extent it will influence bond supply and next year will be no different.

What is already clear though is that there are a number of chunky financings which could well result in sizable EUR issuance as part of the overall capital markets package next year, including Bayer's USD66bn acquisition of Monsanto, AT&T's USD85.4bn purchase of Time Warner and Fox's USD14.1bn procurement of Sky.

Floodgates to open in January?

Whatever 2017 has in store for the Euro primary corporate market it is looking increasingly likely that we will see a typical start to the new year whereby primary markets get out the blocks quickly.

This expectation is supported by an impressive rebound in risk sentiment in recent weeks after a very volatile period following Trump's surprise victory at the US presidential elections in November.

This constructive tone is in stark contrast to early 2016 when heightened volatility linked to plummeting oil prices and China growth concerns largely kept Euro corporate supply in check.

This saw only EUR5.28bn of IG corp supply in Euros price in January and that largely thanks to Daimler which provided EUR3.25bn of that total via a 3-part deal on 05th January.

The pace did step up in February which produced EUR26.15bn from 32 deals, and then the ECB announced its plans to purchase corporate bonds (CSPP) at its meeting on 10th March, and the rest of course is history.

However, feedback suggests we should expect something very different in January 2017, accentuated by the number of potential issuers that were looking to pull the trigger since the US elections but were deterred by such inflated new issues premiums at the time.

One syndicate manager also felt that it makes sense for corporate issuers to get in early next year ahead of more potential volatility linked to developments regarding Brexit and the political/banking situation in Italy, along with various elections in Europe and the impact of Trump's presidency.

To what extent US issuers contribute to this anticipated flood of paper in the new year remains to be seen, although either way you might want to buckle yourselves in and hold on tight....!

matthew.barrett@informagm.com & elle.breed@informagm.com

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